E pluribus hokum: When the gamblers bail out the casino

[suchandra]

Think of America as a town with one casino, in which the only economic activity is gambling. Most people lose, but the casino keeps lending them more money to play. Eventually, of course, the casino must go bankrupt and with it the town...

Since Prabhupada solved this problem by instructing to set up self sufficiency where hardly any money is required, again we can say, the Vaishnava institution are responsible to not set a good example.

 

When the gamblers bail out the casino

 

 

By Spengler – Asia Times September 23, 2008

 

 

Why should American taxpayers give US Treasury Secretary "Hank" Paulson a blank check to bail out the shareholders of busted banks? Why should the Treasury turn itself into a toxic waste dump for their bad loans? Why not let other banks join the unlamented Brothers Lehman in bankruptcy court, and start a new bank with taxpayers' money? Or have the Treasury pay interest on delinquent mortgages, and make them whole? Even better, why not let the Chinese, or the Saudis or other foreign investors take control of failed American banks? They've got the money, and they gladly would pay a premium for an inside seat at the American table.

 

None of the above will occur. America will give between US$700-$800 billion to the Treasury to buy any bank assets it wants, on any terms, with no possible legal recourse. It is an invitation to abuse of power unparalleled in American history, in which ill-paid civil servants will set prices on the portfolios of the banking system with no oversight and no threat of legal penalty.

 

Why are the voices raised in protest so shrill and few? Why will Americans fall on their fountain-pens for their bankers? If America is to adopt socialism, why not have socialism for the poor, rather than for the rich? Why should American households that earn $50,000 a year subsidize Goldman Sachs partners who earn $5 million a year?

 

Believe it or not, there is a rational explanation, and quite in keeping with America's national motto, E pluribus hokum. Part of the problem is that Wall Street, like the ethnic godfather in the old joke, has made America an offer it can't understand. The collapsing the mortgage-backed securities market embodies a degree of complexity that mystifies the average policy wonk. But that is a lesser, superficial side of the story.

 

Paulson's dreadful scheme will become law, because Americans love their bankers. The bankers enable their collective gambling habit. Think of America as a town with one casino, in which the only economic activity is gambling. Most people lose, but the casino keeps lending them more money to play. Eventually, of course, the casino must go bankrupt. At this point, the townspeople people vote to tax themselves in order to bail out the casino. Collectively, the gamblers cannot help but lose; individually they nonetheless hope to win their way out of the hole.

 

Americans are so deep in the hole that they might as well keep putting borrowed quarters into the one-armed bandit. They have hardly saved anything for the past 10 years. Instead, they counted on capital gains to replace the retirement savings they never put aside, first in tech stocks, then in houses. That hasn't worked out. The S&P 500 Index of American equities today is worth what it was in 1997, after adjusting for inflation (and a pensioner who sells stock purchased in 1997 will pay a 20% capital gains tax on an illusory inflationary gain of 40%). Home prices doubled between 1997 and 2007 before falling by more than 20%, with no floor in sight.

 

As it is, many of the baby boomers now on the verge of retirement will spend their declining years working at Wal-Mart or McDonalds rather than cruising the Caribbean. Some of them still have time to tighten their belts and save 10% of their income (by consuming 10% less), plus a good deal more to compensate for the missing savings of the 1990s.

 

Altogether, they'd rather gamble, and if that requires a bailout of the house, they gladly will chip in to pay for it. After all, today's baby boomers won't pay for the bailout. The next generation of taxpayers will pay for Paulson's $700-$800 billion. If that enables the present generation to keep borrowing rather than saving, it is no skin off their back. If home prices continue to collapse, the baby boomers will die in debt anyway, working at low-paying jobs until the day before their funerals.

 

The homeowners of America hope against hope that somehow, sometime, the price of their one only asset will bounce back. The character of Mortimer Duke in the 1983 film Trading Places comes to mind. After losing his fortune in the frozen orange juice futures market, Duke screams, "I want trading reopened right now. Get those brokers back in here! Turn those machines back on! Turn those machines back on!" If a reverse takeover of the US government by Goldman Sachs is what it takes to turn the machines back on, the American public will support it. Sadly, there is no reason to expect the bailout of bank shareholders to have any effect at all on American home prices, which will continue to sink into the sand.

 

Contrary to what the Bush administration says, it is not the case that banks' troubled mortgage assets cannot be sold in the private market. Those are the so-called "Level III" assets that banks say they cannot value. But that is only a dodge that the banks use to postpone taking losses. There is a ready bid for these assets from hedge funds, in multi-hundred-billion-dollar size. The trouble is that the market bid is 25% to 30% below the prices that banks carry these assets on their books. Traders at Wall Street boutiques who specialize in distressed securities say that US regional banks regularly make discreet offers to sell private mortgage-backed securities (not guaranteed by a federal agency) at prices, for example, of 75 to 80 cents on the dollar. Hedge funds bid, for example, 55 to 60 cents in return.

 

On rare occasions, the bank seller and the hedge fund buyer will meet in the middle, although very few transactions occur. Although many banks are desperate to sell, they cannot accept the offered price without taking losses over the threshold of mortality, for write-downs of this magnitude would destroy their shareholders' capital. Investment banks typically hold about $30 of securities for every $1 of capital, so a 3% write-down would leave them insolvent. Lehman Brothers classified 14% of its assets as Level III at the end of the first quarter; Goldman Sachs was at 13%. Why is Lehman bankrupt, and Goldman Sachs still in business? If Secretary Paulson, the former head of Goldman Sachs, had not proposed a general bailout last week, we might already have had the answer to that question.

 

For the Paulson bailout to be helpful to the banks, it must buy their securities at much higher prices than the private market is willing to pay. Otherwise it makes no sense at all, for the banks could sell at any moment to the hedge funds. But that is a subsidy to private banks, administered at the whim of the Treasury Secretary, without oversight and without the possibility of legal recourse.

 

Some Democrats in Congress are asking for some form of oversight, but it is hard to imagine how they might use it, for a Treasury with $800 billion to spend would constitute the whole market bid for low-quality mortgage assets, and would set whatever prices it wished. Professionals with years of experience set prices on these securities with great uncertainty. How would an overseer determine if it had set the correct price? And if the Treasury decided to bail out one bank (say, Goldman Sachs) rather than another, how would the overseer judge whether that decision was judicious, politically motivated, venal, or arbitrary?

 

Opposition to the Treasury plan is disturbingly thing. Bloomberg News on June 21 quoted the Democratic chairman of the Senate Banking Committee, Christopher Dodd, saying, "I know of nobody who is arguing over the amount of money or even about that the secretary ought to have the authority to purchase these toxic instruments, these bad debts."

 

Why the taxpayers of America would allow their pockets to be picked in this fashion requires a different sort of explanation than one finds in economics textbooks. My analogy of gamblers taxing themselves to bail out the casino is inspired, in part, by a remarkable new book by the Canadian economists Reuven and Gabrielle Brenner (with Aaron Brown), A World of Chance. In effect, the Brenners re-interpret economic theory in terms of gambling, showing how profoundly gambling figures into human behavior, especially in such matters as so-called life-cycle investing. The 50-ish householder who has not made enough to retire may take outsized chances, considering that as matters stand, he will work until he drops dead in any case. The Brenners write:

 

If people reach the age of fifty or fifty-five and have not "made it," what are their financial options to still live the good life? Except for allocating a few bucks to buy lottery tickets, it is hard to think of any other option. If people find themselves down on their luck and see no immediate opportunities to get rich, what can they do to sustain their hopes and dreams? Allocating a fraction of their portfolios with a chance to win a large prize is among the options. And when people are leapfrogged - that is, when some "Joneses" who were "below" them jump ahead - how can they catch up? They will tend to challenge their luck for a while, taking risks that they might have contemplated before in business, financial markets, and other areas but did not follow up with action.

 

A World of Chance undermines our usual view of "economic man" and substitutes the angst-ridden, uncertain denizen of a world that offers no certainties and requires risk-taking as a matter of survival. I hope to offer a proper review of the work in the near future. As my marker, though, permit me to leave the thought that for providing a theoretical foundation for the counter-intuitive behavior of American taxpayers, the Brenners deserve the Nobel Prize in economics.

 

Alas for the gamblers of America: they will tax themselves to keep the casino in operation, but it will not profit them. Where, oh where, is America's Vladimir Putin, who will drive out the oligarchs who have stolen the country's treasure and debased its currency?

www.atimes.com/atimes/Global_Economy/JI23Dj06.html

[Kulapavana]

 

Alas for the gamblers of America: they will tax themselves to keep the casino in operation, but it will not profit them. Where, oh where, is America's Vladimir Putin, who will drive out the oligarchs who have stolen the country's treasure and debased its currency?

 

 

Spot on... The same group of people that now controls America tried to take over Russia as well. But the Russians knew what they were up to and foiled their plans. Alas, Americans are much dumber and bought the con game hook, line, and sinker...

[suchandra]

 

Spot on... The same group of people that now controls America tried to take over Russia as well. But the Russians knew what they were up to and foiled their plans. Alas, Americans are much dumber and bought the con game hook, line, and sinker...

First let's check if the whole credit crisis isn't yet another staged scenario to divert attention.

Merkel is known for never doing things on her own. She would never say anything unless she's got the order. If she makes a comment like below she must have been told to do this by an adviser of G.W. Bush.

 

Merkel Says Washington Helped Drag Europe into the Credit Crisis

 

 

Spiegel Online – September 22, 2008

 

 

The United States government is campaigning around the world for support for its multibillion-dollar Wall Street rescue package. The reaction has been skeptical at best – and in Europe the plan has been met with bareknuckled criticism.

 

German Chancellor Angela Merkel has accused the US government of serious failures which she believes contributed to the current credit crisis. In particular she blamed Washington for resisting stricter regulation.

 

On Monday she also said the crisis could hurt the German economy. "The whole thing is going to set the pace for the economy in the coming months and perhaps years," Merkel said at a meeting of her party, the conservative Christian Democrats.

 

Over the weekend the US said it would provide $700 billion to cover bad debt on Wall Street and ensure the survival of some financial institutions. On Sunday US Treasury Secretary Henry Paulson then called on foreign governments to launch similar bailouts for their own banks. "We are talking very aggressively with other countries around the world and encouraging them to do similar things and I believe a number of them will," Paulson told ABC News.

 

But the governments of Germany and Great Britain have shaken their heads.

 

While her finance minister said German banks would not need a similar bailout, Merkel said the world community should react by forging international agreements that could be voluntary rather than anchored in law. "The crisis on the international financial markets shows us that you can do some things on the national level, but the overwhelming majority must be agreed to on the international level." Instead of codifying these deals in law, Merkel suggested binding agreements between major economic players. "This is about greater transparency," she said.

 

A day earlier, during a visit to Austria, the German chancellor had even firmer words. "I'm criticizing the self-image of the financial markets -- which have unfortunately resisted voluntary rules for too long with the support of the governments of Great Britain and the United States."

 

 

 

'This Cannot Be Allowed'

 

At a political rally in Linz, Merkel indirectly attacked US President George W. Bush. She suggested that American obstinacy had dragged other industrial nations into the credit crisis. Many European countries, she said, had already imposed stringent conditions on their banking sectors. "We dutifully adopted a nice EU directive into national law, and we had to deal with numerous complaints from small- and medium-sized companies in doing so. When the day came, the Americans said, 'We won't'," Merkel said. "That cannot be allowed in the international sphere." Merkel complained that taxpayers would be forced to foot the bill in countries far beyond the US and Britain.

 

She was referring to the "Basel II" agreement, a set of international standards which tightened capital requirements for credit institutions. Much of the EU has signed up to Basel II, and Germany codified it in 2007. But Washington still hasn't set a date for working its principles into American law.

 

Europe, she said, "must now push to get greater transparency on the financial markets and to get clearer regulations so that a crisis like the current one cannot be repeated."

 

German Finance Minister Peer Steinbrück of the left-leaning Social Democrats is also calling for tighter rules. In an interview with German television he said he wouldn't rule out the idea of an international authority to hammer out regulations – as opposed to the international agreements favored by his boss, Chancellor Merkel.

 

The European Commission in Brussels said it would announce its own plan for improved financial market regulation. EU Internal Market Commissioner Charlie McCreevy is planning to consider the first measure on Wednesday, according to a report in the Financial Times Deutschland. On the agenda is a proposal that would require banks to disclose whether they are retaining a stake in loans they sell to other banks.

 

The requirement could serve as an incentive for banks to pay closer attention to the quality of the credit risks they pass on to others.

 

 

 

The $700 Billion Bailout

 

But Finance Minister Steinbrück said Monday there was no need for Germany to fall in line with the Americans in bailing out its banks. After a telephone consultation with the finance ministers and heads of the central banks of the G-7 states, he said no other member planned to follow the US example. He described Washington's program as "remarkable," but said the situation wasn't as grave in the other six G-7 countries as in the US.

 

The German government has officially greeted the US program, saying Washington "takes its special responsibility seriously" in the crisis unleashed by the American subprime mortgage problem. A government spokesman said the measures would help to defuse the crisis.

 

Others were less certain.

 

"I have doubts about whether this is the smartest way to deal with the issue," Michael Meister, the deputy head floor whip of Merkel's Christian Democrats (CDU) told Handelsblatt, a business daily. Meister said the US could be laying a foundation for the next crisis with its multibillion dollar bailout -- mirroring the decision after the Sept. 11, 2001, terrorist attacks to massively lower interest rates, a move which he said triggered the current turbulence on the financial markets.

 

Joachim Poss, deputy parliamentary whip for the center-left Social Democrats, also rejected calls from Washington to participate in the bailout. "The Americans can't make Germany liable for their own failure and arrogance. A similar action is neither planned nor necessary in Germany," he said. However, he wouldn't comment on whether he thought the US bailout was necessary. "That's an issue for the Americans," he said.

 

In Britain, Prime Minister Gordon Brown told the BBC: "People were taking risks that were excessive -- and that was mainly in my view in America and we are paying a price for what has come out of America."

 

"We're not working toward implementing a US-style resolution regime,” said a spokesman for Chancellor of the Exchequer Alistair Darling, Britain's finance minister. "But the prime minister and the chancellor have made clear that we will take whatever action is necessary in the interest of financial stability."

 

As a result of the crisis, European countries including Germany, Britain and the Netherlands have announced temporary bans on short sales, which many experts say helped bring Wall Street's powerful investment banks to their knees.

The global financial crisis could also have a stronger and lengthier impact on the German economy than previously believed. According to information obtained by SPIEGEL, the German government plans to reduce its forecast for economic growth in 2009 from 1.2 percent to 0.5 percent.

www.spiegel.de/international/germany/0,1518,579707,00.html

[AncientMariner]

 

Spot on... The same group of people that now controls America tried to take over Russia as well. But the Russians knew what they were up to and foiled their plans. Alas, Americans are much dumber and bought the con game hook, line, and sinker...

 

 

Gotta admit it seems you have been right about a lot of things politically. I have even come around to your viewpoint that 9/11 was basically an inside job.

[suchandra]

 

Gotta admit it seems you have been right about a lot of things politically. I have even come around to your viewpoint that 9/11 was basically an inside job.

Bloomberg says $3 Billion - that is the problem, these really big figures of cash what makes people mad to appear on this list, always ready to harm their own fellow men. The Vedas instruct this is not human behaviour, this is what animals do, crocodiles, mosquitos, spiders, in fact all animals take pleasure to finish off other animals. And the rascals say, God created nature like that with animals eating each other etc etc. Wrong, conditioned souls seem to desire nothing more.

 

Wall Street Executives Made $3 Billion Before Crisis

By Tom Randall and Jamie McGee

http://www.bloomberg.com/apps/news?pid=20601109&sid=aGL5l6xOPEHc

 

 

 

Sept. 26 (Bloomberg) -- Wall Street's five biggest firms paid more than $3 billion in the last five years to their top executives, while they presided over the packaging and sale of loans that helped bring down the investment-banking system.

Merrill Lynch & Co. paid its chief executives the most, with Stanley O'Neal taking in $172 million from 2003 to 2007 and John Thain getting $86 million, including a signing bonus, after beginning work in December. The company agreed to be acquired by Bank of America Corp. for about $50 billion on Sept. 15. Bear Stearns Cos.'s James ``Jimmy'' Cayne made $161 million before the company collapsed and was sold to JPMorgan Chase & Co. in June.

Democrats and Republicans in Congress are demanding that limits be placed on executive pay as part of the $700 billion financial rescue plan proposed by U.S. Treasury Secretary Henry Paulson. The former Goldman Sachs Group Inc. CEO, who received about $111 million between 2003 and 2006, said in testimony to Congress on Sept. 24 that he would accept such limits as part of the plan, after initially opposing them.

``Shareholders and boards should have done something about this a long time ago,'' said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware in Newark. ``They justified these levels of pay on the idea that they're all geniuses. I think that balloon has burst.''

Wall Street firms have shared profits liberally with employees. The five biggest -- Goldman, Morgan Stanley, Merrill, Lehman Brothers Holdings Inc. and Bear Stearns -- paid their 185,687 employees $66 billion in 2007, as problems with subprime mortgages mounted, including about $39 billion in bonuses. That amounts to average pay of $353,089 per employee, including an average bonus of $211,849. The five firms had combined net income of $93 billion during the five years through 2007.

CEO Pay Doubled

The $3.1 billion paid to the top five executives at the firms between 2003 and 2007 was about three times what JPMorgan spent to buy Bear Stearns. Goldman Sachs had the highest total, with $859 million, followed by Bear Stearns at $609 million. CEO pay at the five firms increased each year, doubling to $253 million in 2007, according to data compiled from company filings.

Executive-compensation figures include salary, bonuses, stock and stock options, some awarded for past performance. The options were valued at a third of the fair-market price of the stock at the time the options were granted, a method recommended by Graef Crystal, a compensation specialist and author of the Crystal Report on Executive Compensation, an online newsletter. The companies value the options using different methods.

`Make It Rain'

Wall Street firms have paid employees a greater share of revenue than any other industry, about 50 percent, Crystal said. That tradition at investment banks comes from their history as closely held partnerships of investors who put their own capital at risk, he said.

``In Wall Street and Hollywood, the profits tend to come in great big packets, and everyone wants a piece,'' said Crystal, a former Bloomberg columnist. ``Whether it's the movie `Dark Knight' or a huge merger deal, he who can make it rain, he who can bring everyone to the theater, can earn whatever he wants.''

Until the rain stops.

Lehman Brothers filed for the biggest bankruptcy in history on Sept. 15, with more than $613 billion in debt. The same day, Merrill Lynch was sold to Bank of America for $29 a share, about 70 percent below the stock's high of $97.53 on Jan. 24, 2007.

Goldman and Morgan Stanley, the two biggest independent U.S. investment banks, were forced to convert to bank holding companies, giving them more access to Federal Reserve funds and buying time to acquire deposits. Goldman Chief Executive Officer Lloyd Blankfein made $57.6 million in 2007 in salary and bonus, which includes stock and options granted at the beginning of the fiscal year to reward performance the previous year. Co- presidents Gary Cohn and Jon Winkelried each got $56 million.

`Tied to Performance'

Morgan Stanley's current and former chief executives, John Mack and Philip Purcell, were paid about $194 million over the last five years.

Mark Lake, a spokesman for Morgan Stanley, pointed to Mack's decision not to take a bonus for 2007 and said the $1.6 million in salary and other compensation he was awarded last year isn't ``a lot'' compared with other Wall Street CEOs.

``He has taken everything he had since rejoining the firm in equity, other than salary,'' Lake said. ``There's a difference in taking stock in the firm as a bonus and taking cash. Stock in the firm, obviously you are tied to performance of the firm.''

Goldman Sachs spokesman Michael Duvally declined to comment. Merrill Lynch spokeswoman Jessica Oppenheim, JPMorgan spokesman Brian Marchiony and Lehman spokeswoman Monique Wise didn't return calls for comment.

Paulson, Bush

``The American people are angry about executive compensation, and rightfully so,'' Paulson told a House panel on Sept. 24, departing from his prepared remarks. ``We must find a way to address this in the legislation, but without undermining the effectiveness of this program.''

President George W. Bush said that night in a televised address to the nation that the plan would provide ``urgently needed money so banks and other financial institutions can avoid collapse'' and ``should make certain that failed executives do not receive a windfall from your tax dollars.''

Congressional Republicans splintered late yesterday over the proposed $700 billion rescue plan. Senate Majority Leader Harry Reid said this morning at a news conference that Democrats are circulating a draft of legislation that contains limits on executive compensation and ensures that Congress has oversight over the bailout. Lawmakers from both parties are meeting again today in Washington.

Weak Record

The U.S. government has a weak record when it comes to regulating compensation, said Kevin Murphy, a professor of finance at the Marshall School of Business at the University of Southern California in Los Angeles.

``Every government attempt that has existed to limit or regulate CEO pay has backfired,'' Murphy said. ``I'm fairly confident this one will backfire too. There are always loopholes.''

Regulation of golden parachutes, or protection for executives in the case of an acquisition, were circumvented in the 1980s with severance agreements, and Nixon's wage-and-price- control experiment in the 1970s ultimately failed, Murphy said.

``It's either the compensation committee or the general counsel or the head of human resources who are trying to negotiate a pay package with someone who will be their boss in a week,'' he said. ``These are things that can be done a lot better.''

Corporate Governance

Rather than government regulation, the solution is in better corporate governance, Elson said. Companies should negotiate more aggressively with executives and should establish rules that encourage shareholders to protest excessive pay. The rescue package is not the place to have that debate, he said.

``This will get in the way'' of passing the $700 billion financial rescue legislation, Elson said. ``We are in a crisis. The patient is dying. Let's work on the details as soon as we get the patient out of the emergency room when we can do it in a thoughtful or deliberate manner.''

Not all Wall Street CEOs have escaped unscathed. Cayne sold a Bear Stearns holding once worth $1 billion for $61 million in March. Lehman's Chief Executive Officer Richard Fuld, who made $165 million between 2003 and 2007, sold 2.88 million of his firm's shares for 16 cents to 30 cents apiece, or less than $500,000, according to a regulatory filing.

Fuld owned 10.9 million shares and restricted stock units as of Jan. 31, valued at $931 million at their peak. He also had in- the-money options and other stock worth almost $300 million, according to Crystal.

To contact the reporter on this story: Tom Randall in New York at trandall6@bloomberg.net; Jamie McGee in New York at jmcgee8@bloomberg.net.

Last Updated: September 26, 2008 13:56 EDT